Oleg Ustenko, Julia Segura, Valentyn Povroznyuk Edilberto L. Segura

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1 June 218 Oleg Ustenko, ia Segura, Valentyn Povroznyuk Executive Summary In June, the Verhovna Rada enacted the new Anticorruption Court Law. Amendments made in y removed some deficiencies in the law, in particular, the proposal that those cases that had been already investigated by NABU should be handled by regular courts and not the new Anticorruption Court. The passage of this amended law is an important step to address corruption in the country. It should pave the way for future co-operation with the IMF and EU. Also in y, Verhovna Rada passed a bill to facilitate the sale of loan collaterals, which in the past required a court decisions. The latest release of the State Statistics Committee confirmed that GDP grew by 3.1% yoy in the first quarter of 218. The mayor sources of GDP growth were gross capital formation (17% yoy) and household consumption (5.6% yoy). Monthly data showed recovery in most economic sectors in 218. Agricultural production showed positive sign for the first time in three months (2.6% yoy, 6.4% mom), and construction output increased by 2.7% yoy (2.5% mom). In like manner, Ukrainian retail trade and passenger turnover increased by 4.9% yoy and 1.8% yoy, respectively. Industrial production also grew by 2.5% yoy in 218, with manufacturing increasing by 3.2% yoy. The consolidated budget was executed with a surplus for the second consecutive month in. Both state and local budgets were in surplus. As a result, the consolidated budget was in surplus of UAH 14.6 billion in uary-. Consumer inflation significantly decelerated in. The all items index decreased from 13.1% yoy to 11.7% yoy mainly thanks to sharp deceleration in growth of foodstuffs prices. In the banking sector, national currency deposits grew at an accelerated rate, while foreign currency deposits denominated in USD declined for the second month in a row. Growth of national currency deposits accelerated thanks to faster expansion of corporate deposits (by 11.6% yoy). Bank lending activities improved again in. Growth of national currency loans accelerated to 16.9% yoy. The UAH/USD exchange rate remained stable in, ending the month at around 26.3 UAH/USD. In 218 the current account of the balance of payments had a small deficit of USD 41 million. Significant growth of the primary & secondary net income surpluses of USD 419 million and USD 326 million, partly compensated a large imbalance of USD 913 million in the merchandise trade account. Financial inflows of USD 37 million, led to an increase in international reserves to USD 18.2 billion. Main Macroeconomic Indicators f GDP, USD billion Real GDP Growth, % yoy Fiscal Balance (incl. Naftogaz/Pension Fund),% of GDP Public Debt, External and Domestic, % of GDP Consumer Inflation, eop, % yoy NBU Key Policy Interest Rate, % eop Hryvnia Exchange Rate per USD, eop Current Account Balance, % of GDP Merchandise Exports, USD billons Merchandise Imports, USD billions FDI, Net Annual Inflow, USD billion International Reserves, USD billion Public External Debt, USD billion Private External Debt, USD billion Copyright SigmaBleyzer 217 All rights reserved Translator: Ieliena Segura Editor: Rina Bleyzer O Malley 1

2 uary ruary ch il June y August September October ember December uary ruary ch il June y August September October ember December uary ruary ch il June y August September October ember December uary ruary ch June 218 Oleg Ustenko, ia Segura, Valentyn Povroznyuk Political and Reform Developments In June, the Verhovna Rada enacted the new Anticorruption Court Law. The review of the law by the Venice Commission (VC), international institutions, and local NGOs revealed some deficiencies, particularly the proposal that those cases that had been already investigated by NABU should be handled by regular courts and not the new Anticorruption Court. However, subsequent amendments were passed in y to ensure that all cases of corruption will be handled by the new Court. The passage of this amended law is an important step to address corruption in the country. It should pave the way for future co-operation of Ukraine with the IMF and EU. In y, Verhovna Rada passed a Bill on Activation of Bank Lending, which should positively affect state of the country s banking sector. Currently commercial banks were required to have a court decision in order to use a collateral. The old scheme did not provide creditors with the required level of protection. According to the newly passed law all procedures related to forced sale of collateral would be significantly eased and put in line with international standards. Economic Growth The latest release of the State Statistics Committee confirmed that real GDP grew by 3.1% yoy in the first quarter of 218. The mayor sources of GDP growth were gross capital formation (17% yoy) and household consumption (5.6% yoy). On the other hand, Ukrainian general government expenditures decreased by -1.4% yoy. Foreign trade had a reduction in exports ( 9.9% yoy) and in imports (- 5.4% yoy). On the supply side of GDP, the largest expansion in 1Q of 218 took place in financial & insurance activities with a 9.7% yoy increase, followed by wholesale & retail trade, which rose by 5.8% yoy, and by information with communication, which grew by 4.9% yoy. In addition, Ukrainian real estate activities expanded by 3.7% yoy, professional, scientific & technical activities rose by 2.8% yoy, and manufacturing increased by 2.7% yoy. Monthly data showed recovery in most economic sectors in 218. Agricultural production showed positive sign for the first time in three months (2.6% yoy, 6.4% mom), and construction output increased by 2.7% yoy (2.5% mom). In like manner, Ukrainian retail trade and passenger turnover increased by 4.9% yoy and 1.8% yoy, respectively. Industrial production also grew by 2.5% yoy in 218, with manufacturing increasing by 3.2% yoy. Within manufacturing, the main growth activities took place in chemicals & chemical products, which grew GDP Production Side - Q1 218 (To corresponding quarter of previous year, % yoy) Public administration and defence; Water supply; sewerage, waste management Human health and social work activities Agriculture, forestry and fishing Transportation and storage Education Accommodation and food service activities Administrative and support service activities Arts, entertainment and recreation Mining and quarrying Construction Electricity, gas, steam and air conditioning Manufacturing Professional, scientific and technical activities Real estate activities Information and communication Wholesale and retail trade Financial and insurance activities Source: The Bleyzer Foundation Ukraine Economic Performance, % yoy (To corresponding month of previous year) Agricultural production indeх Industrial production index Index of construction output Retail trade turnover Freight turnover Passenger turnover Linear (Retail trade turnover) N. Post Oak Ln., Suite 41 4A, Baseyna Street, «Mandarin Plaza», 8th floor Meytin House, 49 Sumska Street, Office 4 Houston, TX 7724 USA Kyiv 14, Ukraine Kharkiv 6122, Ukraine Tel: +1 (713) Tel: +38 (44) Tel: +38 (57) Fax: +1 (713) Fax: +38 (44) Fax: +38 (57)

3 Jun Aug Sep Oct Dec June 218 Oleg Ustenko, ia Segura, Valentyn Povroznyuk by 37.4% yoy; electricity, gas, steam & air conditioning supply, by 8.6% yoy; engineering, by 7% yoy; rubber & plastic products (6.2% yoy); furniture & other repair & installation of machinery & equipment (4.9%yoy); and coke & refined petroleum products (3.5%yoy). But the following subsectors experienced declines in output on a year-over-year basis: basic pharmaceutical products (-6.1% yoy), textile industry (-1.3% yoy) and metallurgy (- 1.2% yoy). Regarding regional growth, in 218 the largest increase in industrial output took place in the following oblasts: Ivano-Frankivsk (16.9% yoy), Donetsk (8.1% yoy), Luhansk (8% yoy), Ternopil (6.9% yoy), Zaporizhzhya (6.6% yoy), Volyn (5.9% yoy), Lviv (4.5% yoy). On the other hand, the regions with the largest declines in output were Rivne (-13.9% yoy), Khmelnytskiy (-1.8% yoy), Odesa (-5.1% yoy), Chernihiv (-4.7% yoy), Mikolayiv (-4% yoy), Kharkiv (-4% yoy), Sumy (-2.5% yoy), Kherson (-1.3% yoy) and Dnipropetrovsk (-.6%yoy). Fiscal Policy The consolidated budget was executed with a surplus for the second consecutive month in. Both state and local budgets were in surplus (UAH 11.4 billion and UAH 3.1 billion respectively). As a result, the consolidated budget was in surplus of UAH 14.6 billion in uary-. As in the previous month, the governement used the surplus to repay loans previously taken to finance budget execution (net repayment totaled UAH 4.9 billion). Also the government pumped out of the economy UAH 8.8 billion of cash and extracted another UAH.8 billion through other instruments of liquidity regulation Dynamics of consolidated budget components (From the beginning of the year) Balance, bln (right scale) Revenues, % yoy (left scale) Expenditures, % yoy (left scale) Consolidated budget revenues were back to growth in Source: The Ministry of Finance of Ukraine, The Bleyzer Foundation. The 4.7% yoy growth was caused by economic factors and some temporary factors. In particular, the statistical base effect from transfer of funds confiscated from Yanukovych in 217 already finished. At the same time, transfer of the 217 NBU s profits was shifted to Q2 with the maximum transfer of UAH 17 billion being executed in. This caused the 115.% yoy increase in nontax revenues. Tax revenues continued to grow at fast although slightly decelerated rate of 27.8% yoy. This growth was ensured by accelerated growth of receipts from corporate profit tax (43.7% yoy) and continued growth of receipts from personal income tax (27.8% yoy). Growth of receipts from the VAT decelerated because of higher reimbursements to exporters but remained high at 18.3% yoy. Receipts from excise taxes returned to growth mainly thanks to increased imports. Growth of the cumulative consolidated budget revenues almost doubled to 14.5% yoy in uary-. Growth of consolidated budget expenditures further accelerated in. The 43.4% yoy growth was the result of expansion in both current and capital expenditures, although the later expanded twice as fast as the former (83.8% yoy against 4.7% yoy). Growth in current expenditures was stimulated by fast growth of expenditures on debt servicing (87.6% yoy). Expenditures on goods and services, on social security, and payroll expenditures also grew at high rates (41.9% yoy, 37.1% yoy, and 3.1% yoy respectively). In uary-, growth of cumulative consolidated budget expenditures further accelerated reaching 26.5% yoy. Payments of the government and the NBU on external debt servicing significantly increased in. In particular, USD million equivalent was paid to the IMF. Other principal and servicing payments on state debt N. Post Oak Ln., Suite 41 4A, Baseyna Street, «Mandarin Plaza», 8th floor Meytin House, 49 Sumska Street, Office 4 Houston, TX 7724 USA Kyiv 14, Ukraine Kharkiv 6122, Ukraine Tel: +1 (713) Tel: +38 (44) Tel: +38 (57) Fax: +1 (713) Fax: +38 (44) Fax: +38 (57)

4 Jun Aug Sep Oct Dec Jun Aug Sep Oct Dec June 218 Oleg Ustenko, ia Segura, Valentyn Povroznyuk denominated in foreign currency totaled USD million, including payments on sovereign bonds of USD million and payments on sovereign eurobonds of USD 18.5 million. Monetary Policy Inflation. Consumer inflation significantly decelerated in. The all items index decreased from 13.1% yoy to 11.7% yoy mainly thanks to sharp deceleration in growth of foodstuffs prices. Better weather conditions as compared to last year and increases in imports led to a larger supply of foodstuffs limiting growth of their prices. At the same time, pressure on prices on the side of production cost, particularly wages, and on the side of recovering consumer demand remained. Core inflation inched down to 9.3% yoy. Apart from foodstuffs, notable deceleration in growth of prices was observed for alcoholic beverages and tobacco products (by 1.1 percentage points to 19.4% yoy), housing and utilities (by.7 percentage points to 4.9% yoy), and restaurants and hotels (by.7 percentage points to 16.4% yoy). Home appliances was the only major group of goods and services observing notable acceleration in growth of prices (by.5 percentage points to 6.1% yoy). Other major groups of goods and services observed little or no changes in price dynamics in. Banking Sector. Bank deposits posted mixed developments in. National currency deposits grew at an accelerated rate, while foreign currency deposits denominated in USD declined for the second month in a row. Growth of national currency deposits accelerated thanks to faster expansion of corporate deposits (by 11.6% yoy compared to 8.% yoy in il). Bank lending activities improved again in. Growth of the national currency loans accelerated to 16.9% yoy thanks to accelerated increase in household loans (45.2% yoy) and growth of corporate loans (11.6% yoy). The decline of the foreign currency loans decelerated again inching CPI, PPI, and Growth of Prices for Select Goods and Services, % yoy CPI PPI Foodstuffs and nonalcoholic beverages Wearing apparel and footwear Housing and utilities Home appliances Healthcare Transport Source: State Statistical Service of Ukraine, The Bleyzer Foundation Dynamics of Money Supply, Deposits, and Loans % yoy Money supply Hryvnia deposits FX deposits in USD Hryvnia loans FX loans in USD Source: The NBU, The Bleyzer Foundation down to.5% yoy mainly thanks to faster growth of corporate loans (3.2% yoy) as household loans continued to decline rather fast (by 17.9% yoy). The decline in cash resources together with lower balances at the correspondent accounts of banks led to some monthly decline of the monetary base (by 1.2%) and deceleration in its over-year growth (to 1.6%). At the same time, money supply slightly expanded in (by.5% mom and 1.% yoy). Hryvnia Exchange Rate. The UAH/USD exchange rate was stable during the first half of June. However, repatriation of dividends by non-residents and the VAT reimbursements led to gradual depreciation of the exchange 123 N. Post Oak Ln., Suite 41 4A, Baseyna Street, «Mandarin Plaza», 8th floor Meytin House, 49 Sumska Street, Office 4 Houston, TX 7724 USA Kyiv 14, Ukraine Kharkiv 6122, Ukraine Tel: +1 (713) Tel: +38 (44) Tel: +38 (57) Fax: +1 (713) Fax: +38 (44) Fax: +38 (57)

5 Sept Sept * Sept June 218 Oleg Ustenko, ia Segura, Valentyn Povroznyuk rate from June 13th to June 2th. Then the exchange rate appreciated back to the level observed at the beginning of the month but not for long, as another tranche of the VAT reimbursements caused depreciation at the end of the month. Overall, the exchange rate depreciated by.8% to around UAH/USD in June. The NBU continued reforming the foreign exchange market in. The regulator simplified the procedures for foreign exchange operations. First, the NBU decreased the number of paper documents needed for a foreign exchange operation for banks (they may save only electronic version of the document and may not print the document for the client on his/her consent). Second, banks and financial institutions are now allowed to conduct foreign exchange operations through chip and pin machines. Third, banks and financial institutions are allowed to prepare reports on foreign exchange operations in the form of electronic document. Also, observing positive results from changes in foreign exchange positions of banks introduced earlier, the regulator decided to equalize them introducing equal limits for long and short foreign exchange positions of banks at 5%. International Trade and Capital In 218 the current account of the balance of payments had a small deficit of USD 41 million. Significant growth of the primary & secondary net income surpluses of USD 419 million and USD 326 million, Ukraine's External Balance of Payments, mln USD Financial account, left scale, $ mln USD partly compensated a large imbalance of USD Current account, left scale, $ mln USD million in the merchandise trade account. The main Overall Balance of Payments, $ mln USD Exports of goods and services, right scale, $ mln USD reason for the merchandise trade deficit was a slower 1 Import of goods and services, right scale, $ mln USD growth of goods exports (3.2% yoy to USD billion) than goods import (which increased by 15.5% yoy to USD 4.6 billion). On the merchandise export side, the highest growth took place in exports of chemicals goods with a 49.2% yoy growth; metals products, which expanded by 3.2% yoy; and wood products, which increased by 25.9% yoy. Similarly, exports of industrial goods grew by 17.8% yoy, mineral products increased by 12.9% yoy, and machinery & equipment, by 11.4% yoy. Dynamics of the Average Weighted UAH/USD Exchange Rate in the Interbank Forex ket Source: The NBU, The Bleyzer Foundation On the import side, Ukraine s merchandised import increased in all product groups of products, as follows: mineral products, 12.9% yoy; machinery & equipment, 17.8%yoy; metals goods, 2.4% yoy; chemicals, 1.8% yoy; industrial goods, 16.8% yoy; agricultural products, 22.7% yoy; and timber & wood products, 16.8% yoy. With regard to the geographical distribution of the merchandised trade of Ukraine, in uary- 218 the largest deficit of trade turnover was with the Russian Federation, which grew by 73% yoy, or USD -83 million, to USD Source: NBU, The Bleyzer Foundation N. Post Oak Ln., Suite 41 4A, Baseyna Street, «Mandarin Plaza», 8th floor Meytin House, 49 Sumska Street, Office 4 Houston, TX 7724 USA Kyiv 14, Ukraine Kharkiv 6122, Ukraine Tel: +1 (713) Tel: +38 (44) Tel: +38 (57) Fax: +1 (713) Fax: +38 (44) Fax: +38 (57)

6 June 218 Oleg Ustenko, ia Segura, Valentyn Povroznyuk 2 billion. During this period, imports from Russia increased by 28.7% yoy (to USD 3.2 billion) while exports fell by 7.2% yoy (to USD 1.3 billion). On the other hand, the highest growth of trade turnover took place with Europe, which increased by 14.4% yoy (to USD 15.2 billion), with export and import growth of 2.7% yoy and 9.9% yoy, respectively. Although from a low base, the largest rate of trade growth was with the US, with 37.4% yoy (USD 6 million) growth in exports and 7.3% yoy (USD 1.5billion) growth in imports, in uary Regarding the financial account of Ukraine, financial inflows amounted USD 37 million in 218, mainly caused by net private inflows (USD 42 million), while the outflows of the public-sector were due to debt repayments (USD 113 million). Ukraine had to repay IMF debt of USD 368 million in 218. Therefore, from the beginning of the year the accumulated amount of repayments to the IMF reached USD 98 million. Foreign direct investments net inflows reached USD 15 million, 75% of which was sent to the banking system. The overall consolidated surplus of the balance of payments of Ukraine amounted USD 266 million, in 218. At the end of June 1, the volume of international reserves amounted USD 18.2 billion which provides import financing for of the future period within 3.2 months. 123 N. Post Oak Ln., Suite 41 4A, Baseyna Street, «Mandarin Plaza», 8th floor Meytin House, 49 Sumska Street, Office 4 Houston, TX 7724 USA Kyiv 14, Ukraine Kharkiv 6122, Ukraine Tel: +1 (713) Tel: +38 (44) Tel: +38 (57) Fax: +1 (713) Fax: +38 (44) Fax: +38 (57)